Small firms facing cash crunch seek cheaper funds, leniency on bad loans
NEWDELHI: Small businesses facing liquidity crunch are seeking cheaper funds and a long rope before lenders consider it fit to start recovering dues.
Micro, small and medium enterprises (MSMES) say that the government and the Reserve Bank of India (RBI) should do more so that they have easy access to funds given that anaemic banks have been placed under lending restrictions and non-banking financial companies (NBFCS) are facing a liquidity crunch.
Earlier this month, Prime Minister Narendra Modi had announced several benefits, including an offer for loans of up to ₹1 crore in 59 minutes, and a 100-day drive to help MSMES to secure loans. Small businesses had welcomed the announcement, but now want the measures to be more liberal.
They said the cost of funding, which ranges from 9-24% depending on the funding facility and risk, hurt their competitiveness. Banks charge about 9-16%, while NBFCS, bank-like financing institutions most of which do not accept deposits, charge up to 24%. One of the biggest problems of small businesses is that many do not have assets to pledge, which pushes up the cost of funds.
According to Chandrakant Salunkhe, founder and president of SME Chamber of India, while the authorities should ease lending restrictions on banks placed on prompt corrective action, bank officials should proactively implement the relief given by the RBI, especially those on classification of loans.
In June, the RBI had temporarily allowed banks and NBFCS to show loans of up to ₹25 crore given to small businesses as standard assets even if dues were unpaid up to 180 days. The norm is 90 days for big businesses. This relief was available only till the end of this year, and will be rolled back to 90 days gradually by May 1, 2019, for Gst-regis- tered firms. For others, it will kick in from the beginning of 2019.
Salunkhe said that despite the RBI circular, the relief was, in effect, denied to small firms, as bank officials waited endlessly for instructions from headquarters. Once classified as a bad loan, banks either give a chance to correct the default, restructure the loans or initiate recovery. There are about 65 million MSMES in the country, but only a fraction are Gst-registered.
Loans to small businesses of up to ₹25 crore are covered under a special regulatory window, wherein either a bank official or a panel examines the best course of action in case of a default. Defaults of larger loans are covered under a rigorous frame- work, which was introduced by the RBI in February, and the Insolvency and Bankruptcy Code. Small businesses, which endured the liquidity problems during the 2016 high-value currency ban, and the subsequent business disruption caused by the goods and service tax (GST) roll out in 2017, are a major support base for political parties, including the ruling BJP.
MSMES said the top brass of the banking sector was not interested in listening to them. “Monday’s (RBI board) meeting is crucial. We find that chairmen of banks are not available to listen to small businesses. We will stage road shows and morchas in December,” said Salunkhe. Small businesses also sought quick sanction of loans above Rs 1 crore for feasible projects, besides land for starting projects at a lower cost.
RBI data shows that bank credit to micro and small businesses had jumped 9.5% at the end of September from the corresponding period of the previous year to ₹9.4 lakh crore.
Like an upright CFO who dares oppose the writ of the promoter and creates a blasphemous situation by seeking to make a distinction between the interests of the promoter and those of the company, the RBI governor too must stand firm in the larger interests of the country. Unlike the typical CFO, though, has the luxury of seeking support from his constituency by placing the core issue in the public domain.
In a liberal democracy such as ours, RBI is mandated to play an independent role in the interests of maintaining macro-economic stability. This essentially means ensuring growth with stability, adopting prudent policies to contain risk, and building sufficient buffers to protect against shocks. Those with elementary economic knowledge would thus recognize the inherent conflict built into the institution’s mandate itself when it interacts with other constituents including the government or the public.
For example, ensuring macroeconomic stability is a complex interplay of interest rates, currency, control over the aggregate level of liquidity and inflation. A depreciated exchange rate will imply stronger exports but higher inflation which in turn will necessitate higher interest rates on government bonds if liquidity norms are to be in control! Someone will always be dissatisfied. Hence, the challenge is all about choices being made by a highly competent set of professionals who are not elected representatives, but ones selected based on their competency to evaluate such choices and maintain the delicate balance required. Brazil, Russia, and Argentina are examples where experiments of simultaneously lower interest rates and a depreciated exchange rate had a devastating impact on their objective of growth with macro economic stability.
Such choices must therefore be left to professionals, not those who represent the majority. However, as in any liberal democracy, frameworks must be enacted to determine the appropriate scope for discussion and institutional oversight.
Despite problems in its decision-making structures, the RBI Board is one such mechanism but it must not be forgotten that its role is advisory and restricted to policy guidance. Like any other Board it has representation from luminaries of various backgrounds but they must ultimately be guided by the inputs from those who have both the technical understanding and accountability to manage the economy.
ONE OF THE BIGGEST PROBLEMS OF SMALL BUSINESSES IS THAT MANY DO NOT HAVE ASSETS TO PLEDGE